Sharekhan Blog

What is Call Writing?

  • Apr 14, 2024

Here’s a quick look at all you need to know about call writing.

Call Writing Meaning

Call writing meaning is quite simple. Investors can sell call options for a premium at a particular strike price. The fixed price at which an underlying security or asset can be purchased or sold on the options contract's expiration date is known as the striking price. The options contract's expiration date indicates the point at which it becomes null and void.

Investors who write call options are entitled to receive the premium from the call option buyer. Under this approach, the call writer loses money if the stock price rises because the buyer can execute the option and acquire the asset at the predetermined strike price. On the other hand, the call writers stand to make a profit equivalent to the premium if the stock price stays the same.

Benefits of Call Writing

The call writer's and the option buyer's fortunes go in diametrically opposed directions. In the event that the option buyer makes money, the call writer will lose money, and vice versa. The premium amount is the call writing approach that offers a reasonably advantageous outcome for the call writer. The call writer's risk and liabilities lessen as time goes on since the underlying asset's value drops. So, now that you know what is call writing and its benefits, let’s explore its example.

Call Writing Example

Assume that a trader has 100 shares of ABC stock, which are now trading for Rs. 100 apiece. The trader has chosen to write a call option contract with an expiration date of three months from now and a strike price of Rs. 105 because they believe the stock price will remain relatively high over the next months. The investor will receive a premium of Rs. 300 (Rs. 3 x 100 shares) for each 100 shares covered by the call option. As a result of selling the call option, the investor in this call writing example earned premium money and adopted a bullish position on the stock.

At option expiration, the investor will receive a return of the INR 300 premium paid for the call option if the price of ABC's shares stays at or below INR 105. At the strike price of INR 105, the call option buyer has the right to acquire the stock from the investor if the price of ABC's stock climbs over that amount. As a result, the investor would lose money but still keep the INR 300 premium they had paid.

Call Writing Result Analysis

In this specific call writing example, the trader sells the call option for a premium and has a bullish view of the company. The trader will receive a return of the INR 300 premium paid for the call option if the price of ABC's shares at the option's expiration stays at or below INR 105. However, the buyer of the call option still has the option to buy the stock from the broker at the fixed strike price if the price of ABC's stock rises above INR 105.

The trader would still have the INR 300 premium even if they suffered a loss in this scenario. Before taking a call-writing position, investors must thoroughly evaluate the stock price and the prognosis for the market. This strategy may be a terrific method to generate premium income, but it also entails limitless risk, so many investors may find it inappropriate.

Types of Call Writing

If you are thinking about possibilities for call meaning in the share market, here are some typical tactics to think about:

1. Naked Call Writing: Traders that use the naked call writing technique do not hold the underlying stock or asset. Instead, they write call options. Due to the uncapped and infinite rise in stock prices, it has the largest potential for loss.

 2. Collar Options: Using this call writing approach, you buy a put option and write a call option at the same time. The put option safeguards against possible losses brought on by the call option.

3. Covered Call: In this approach, you write call options on stocks you already own in the company. It makes sense when you think the underlying stock's price will rise or stay the same for a while. A covered call may limit possible profits but also helps limit losses.

Conclusion

The call writing and put writing have emerged as a popular tactical yet sophisticated trading method in today’s fast-paced trading world. Traders can benefit from selling call options, but they also carry some risk, like having a limited upside and having to sell at a fixed price. A successful call writing technique must balance potential benefits and downsides. Register at Sharekhan for more insights.

Team Sharekhan
by Team Sharekhan

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